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While earnings season got off to a decent start thanks to strong results from financials, we have seen a few more bumps in the road lately. In particular, the technology sector reported a series of sluggish figures on the earnings front, with Microsoft (MSFT - Analyst Report) stealing the show.

Microsoft Earnings in Focus

Microsoft, the Washington-based computer giant reported earnings of just 59 cents a share, missing the Zacks Consensus Estimate by 15 cents, or roughly 20.3%. This was especially surprising as MSFT had beaten estimates in each of the last four quarters by a decent margin, further adding to the market’s shock (also see 3 Hot Sector ETFs Surging to #1 Ranks).

It also didn’t help that the company had a swing and a miss on the revenue front as well, as sales came in at $19.89 billion. While this was up double digits year-over-year, it was down about 2.9% when compared to last quarter, and missed our estimates by 4%.

Though when investors drill into the various divisions of MSFT, the picture becomes a little cloudier in terms of the near term outlook for the company. Many divisions, such as the entertainment and devices segment (home to the Xbox and phones), the Microsoft Business Division, and online services, saw strong growth levels and helped the company in the quarter.

However, the Windows division did see more weakness, as sales in this key segment plunged 22.7% sequentially. This is important because the division accounts for about one-fifth of the firm’s total revenues, and is arguably the flagship (or at least best-known) division of the company.   

This sharp decline also underscores the popularity of tablets and the lack of demand for windows-based PCs, especially in the consumer market. The collapse in interest here also helps to explain why Microsoft margins also slumped, with gross margins falling about 500 basis points year-over-year, and then operating margins in particular for Windows crashing to 23.9%, a situation which is always troubling for technology firms (read Buy These ETFs to Profit from Sector Rotation).

Market Impact

As you might expect, this news wasn’t well-received by the markets, as MSFT shares plunged on the day. Shares were trading lower by close to 12% on the session, with volume that was roughly five times a normal day.

This helped to push tech-heavy benchmarks lower for the session, and the losses were assisted by weakness in a couple other big tech names as well. In fact, Google missed earnings and slumped, while (IBM - Analyst Report) and (HPQ - Analyst Report) also faced weakness, partially due to the sluggish trading from Microsoft.

Beyond these individual securities, a number of tech ETFs also struggled on the day including the following three which have big allocations to MSFT:

Vanguard Information Technology ETF (VGT - ETF report)

VGT follows the MSCI US Investable Market Information Technology 25/50 Index, holding just over 400 stocks in its basket. With this many securities, the fund obviously has a broad focus on the tech world, although it does have a big cap tilt.

AAPL is currently the top allocation at 12.4% of assets, while MSFT is in second at 8.6%. Rounding out the top four are the also-struggling GOOG and IBM, suggesting that this product has certainly seen some weakness lately (also see 3 Great Tech ETFs That Avoid Apple).

This ETF lost about 1.8% in Friday trading, while it has declined by 1.7% over the past five days.

Select Sector SPDR Technology ETF (XLK - ETF report)

The most popular technology ETF on the market, XLK follows the Technology Select Sector Index, holding roughly 75 stocks in its basket. The ETF has a heavy skew towards large cap securities, though it has a pretty even dispersion in terms of industries.

Once again, AAPL is the top company by weighting, with the company accounting for roughly 13.2% of assets. Beyond that, MSFT comes in second at 8.6% of assets, and then GOOG at 7.9% and IBM at 6.7%.

XLK lost about 1.8% on the session, while it has declined about 1.6% in the past five trading days.

iShares Dow Jones US Technology ETF (IYW - ETF report)

This ETF tracks the Dow Jones US Technology Index, giving investors exposure to the broad technology space. The fund holds just over 130 stocks in its basket, using a cap weighted approach to assign assets.

While Apple is the top company in the fund at just under 15.8% of assets, many of the in-focus companies round out the rest of the top five. These include GOOG and IBM at, respectively, 9.4% and 8.1%, and the struggling MSFT at 10.3% (see 3 Sector ETFs to Profit from Rising Rates).

The fund lost about 1.9% on the day, and it is now down 1.5% over the past five day period.

Bottom Line

Microsoft’s weak report sent the stock plunging on the day, and called into question some aspects of the firm’s long term health. This news didn’t help a number of other large cap tech names either, as these also led the market lower for the day.

Given this, a number of tech ETFs slumped to close out the week, finishing the day markedly lower. The pressure will now be on the remaining big tech firms (like Apple) when they report, in order to save the sector from further losses this earnings season.

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